If you were in the full-time workforce in 1980, you likely remember when the 401(k) plan came on the scene. Up until that time, pensions were the retirement vehicle of choice, but as pensions became more costly, the 401(k) became the plan of choice and by 1990, it was commonplace in private sector employee benefit plans. As of the early 1990s, 401(k)s had an estimated $900 billion in assets.

SEE: The 4-1-1 On 401(k)s
By 2011, that number had ballooned to $4.3 trillion, but something else had ballooned as well: the fees. As of 2010, plan administrators were charging more than $85 billion in management fees and as more baby boomers find themselves closer to retirement, they're noticing that they aren't as prepared for retirement as they thought they would be, and a portion of the problem may be found in the fees.

How important are the fees? According to the Vanguard Group, for every .5% in fees, a person will have 10% less in their 401(k) after 30 years of work. For this reason, workers need to closely monitor the fees they're paying for their 401(k).

SEE: 401(k) Fees You Need To Know

A Mattress
We've all heard how difficult it is to make side-by-side comparisons of mattresses, because different model numbers are manufactured for individual stores. To some degree, that's also the case with 401(k)s. Plans are often put together by the employer and the plan administrator, but until now, not all fees that are passed on to the individual employee have been disclosed.

Under new laws set to go in to effect by the beginning of April (Although it could be pushed back), all fees being passed on to the employee must be disclosed in an easy-to-read format, so employees can compare the efficiency of their choices. The company administering the plan will also have to disclose how they are collecting the fees. That may include billing the plan, deducting the fees from the employee's gains or taking a percentage off the plan's total return.

The Benefits
Experts believe that by disclosing the fee structure, more companies will include more passively managed funds that tend to be much lower in fees than actively managed funds, which employ investors who try to beat the overall market yet show only marginal success over the long term.

According to the Huffington Post, adding a wider range of passively managed index funds could come with a large benefit. One study found that a retirement account could be up to $450,000 larger if a predominance of index funds with low fee structures were used. Under new disclosure laws, those without sophisticated financial knowledge would finally be able to compare the various offerings using the easy to understand information disclosed.

The Bottom Line
Not sure what you're being charged with your current 401(k) holdings? Current laws require that certain fees be disclosed already. Request a prospectus for each of your funds or look for the information online. Consider keeping at least around 20% of your allocation in a passively managed index fund that is probably already offered.

Your employer will soon be required to disclose to you all fees associated with your plan. Once that information is provided to you, take some time to read through it and make changes to your plan based on that knowledge. Better yet, pay a fee-only investment advisor a one-time fee to examine your 401(k) and recommend changes.

SEE: Paying Your Investment Advisor - Fees Or Commissions?

Related Articles
  1. Stock Analysis

    3 Stocks that Are Top Bets for Retirement

    These three stocks are resilient, fundamentally sound and also pay generous dividends.
  2. Investing News

    4 Value Stocks Worth Your Immediate Attention

    Here are four stocks that offer good value and will likely outperform the majority of stocks throughout the broader market over the next several years.
  3. Professionals

    How to Protect Retirement and Help Adult Kids

    Parents can both protect their retirement money and help their adult kids. Here's how.
  4. Mutual Funds & ETFs

    The 4 Best Buy-and-Hold ETFs

    Explore detailed analyses of the top buy-and-hold exchange traded funds, and learn about their characteristics, statistics and suitability.
  5. Investing

    How ETFs May Save You Thousands

    Being vigilant about the amount you pay and what you get for is important, but adding ETFs into the investment mix fits well with a value-seeking nature.
  6. Retirement

    10 Ways to Save Your Retirement: It's Not Too Late

    It's not too late to start saving for your retirement, even if you took longer to start thinking about it and doing something about it.
  7. Investing

    Why Is Financial Literacy and Education so Important?

    Financial literacy is the confluence of financial, credit and debt knowledge that is necessary to make the financial decisions that are integral to our everyday lives.
  8. Investing

    10 Ways to Effectively Save for the Future

    Savings is as crucial as ever, as we deal with life changes and our needs for the future. Here are some essential steps to get started, now.
  9. Mutual Funds & ETFs

    Mutual Funds Millennials Should Avoid

    Find out what kinds of mutual funds are unsuitable for millennial investors, especially when included in millennial retirement accounts.
  10. Bonds & Fixed Income

    High Yield Bond Investing 101

    Taking on high-yield bond investments requires a thorough investigation. Here are looking the fundamentals.
  1. What licenses does a hedge fund manager need to have?

    A hedge fund manager does not necessarily need any specific license to operate a fund, but depending on the type of investments ... Read Full Answer >>
  2. Can I borrow from my annuity to put a down payment on a house?

    You can borrow from your annuity to put a down payment on a house, but be prepared to pay an assortment of fees and penalties. ... Read Full Answer >>
  3. Can mutual funds invest in hedge funds?

    Mutual funds are legally allowed to invest in hedge funds. However, hedge funds and mutual funds have striking differences ... Read Full Answer >>
  4. What are the main kinds of annuities?

    There are two broad categories of annuity: fixed and variable. These categories refer to the manner in which the investment ... Read Full Answer >>
  5. What are the risks of rolling my 401(k) into an annuity?

    Though the appeal of having guaranteed income after retirement is undeniable, there are actually a number of risks to consider ... Read Full Answer >>
  6. How do I get out of my annuity and transfer to a new one?

    If you decide your current annuity is not for you, there is nothing stopping you from transferring your investment to a new ... Read Full Answer >>

You May Also Like

Trading Center
You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!